Fed maintains bond-buying amid ‘modest’ growth

AFP, WASHINGTON

Fri, Aug 02, 2013 - Page 15

The US Federal Reserve left unchanged near-zero interest rates and its massive bond-buying program on Wednesday, citing modest growth in the world’s largest economy.

Wrapping up a two-day policy meeting, the Federal Open Market Committee (FOMC) said it would continue to buy US$85 billion in bonds per month to help tamp down longer term interest rates that have been supporting the economy, especially the housing market recovery.

The bond-purchase program has filled a gap in the Fed’s toolkit after the central bank slashed its key federal funds rate to zero to 0.25 percent in December 2008 and held it there.

While no one expected a rate hike at the meeting, analysts were surprised the FOMC statement provided no signal on when and how the Fed will begin to taper its asset purchases.

Many analysts believe the move will come at next month’s Fed meeting on Sept. 17-18, but some say it will be delayed because of patchy growth.

“September tapering still a good bet, but the incoming data still matter,” Pantheon Macroeconomics’ Ian Shepherdson said.

Earlier in the day the government reported the US economy grew at a lackluster 1.7 percent annualized pace in the second quarter after 1.1 percent growth in the first quarter.

Pointing to growth “at a modest pace during the first half of the year,” the FOMC said it would keep buying mortgage-backed securities at a monthly pace of US$40 billion and longer-term Treasury securities at US$45 billion.

Reinvesting the mortgage-backed securities and rolling over maturing Treasury securities, the panel reiterated, “should maintain downward pressure on longer-term interest rates, support mortgage markets and help to make broader financial conditions more accommodative.”

The Fed policymakers appeared a little less optimistic about the economy than they were at their June 18 and 19 meeting.

In their prior statement, the economy was described as expanding at “a moderate pace,” stronger language than “modest.”

Though the FOMC largely repeated the previous statement, mentioning an improving jobs market and housing sector, this time Fed officials noted “mortgage rates have risen somewhat.”

The FOMC statement made no mention of a tapering timetable, but it highlighted the officials were watching the impact of weak inflation on the economy.

Part of the Fed’s dual mandate of price stability and maximum employment, the panel acknowledged “that inflation persistently below its 2 percent objective could pose risks to economic performance.”

It projected inflation would move back toward that target number over the medium term, whereas last time the panel said it “anticipates” inflation “likely will run at or below its 2 percent objective.”

The Fed reiterated that it would keep its current monetary policy “for a considerable time” after the asset-purchase program ends “and the economic recovery strengthens.”

The central bank together with a number of economists expect that growth will pick up in the second half of the year.